The debt downgrade

Someone asked me to reflect on the downgrade of US debt over the weekend. The bottom line is that it is not political.  The rating agencies were established (S & P in 1941) at different points after the Great Depression to give outside opinions on the credit worthiness of various entities, companies, states, municipalities, and bond issuers of all kinds. S &P rates the debt of something like 120 countries around the world. Bonds trade on three bases, the interest rate offered as compared to similar bonds, the length of maturity and the credit worthiness of the issuer. The lower the rating, the higher the interest rate because of the perceived ability, or lack thereof, for the issuer to pay back the loan when the bond matures. ( Will Rogers famous quote is instructive: "I am not so much concerned about the return on my money as the return of my money"). So, highly speculative issuers, smaller companies with questionable financials, or states with deep deficits will be...(Read Full Post)